I hope you're doing well, this fine Summer's day :)
As you know, our local real estate market is always changing, but some times are more dynamic than others. We're currently seeing a fairly dramatic shift in our marketâ€”we may well look back and consider this to be a pivotal time.
Interest rates were lowered to stimulate the economy, including real estate activity. This strategy has worked very well. Now, interest rates may have bottomed and slowly begun increasing, possibly generating a new cycle. In recent days, Federal Reserve Chairman Ben Bernanke has clarified the Fedâ€™s outlook for the conclusion of Quantitative Easing (QE), saying he anticipates that the Fed's likely to begin 'tapering' its bond purchases late this year, and end them in 2014 if employment improves as he expects. Will this be the final chapter of QE? It sure looks possible.
Just the mention of this 'tapering' sent the stock market to its worst two-day decline of the year, and pushed 10-year Treasury yields to their highest level in almost 2 years. Since bottoming out at 1.4% last summer, rates have risen more than 60 percent to 2.4%. Long term bond rates influence mortgage rates, so it's not surprising that mortgage costs have ticked higher in the past month. The average 30-year fixed-rate conforming mortgage has climbed to 4.17%, the 6th straight weekly increase and the highest since March 2012.
What does all this mean for the housing market?
The good news for buyers is that although interest rates have edged a little higher, they're still historically lowâ€”at least for now. Those buyers who have been sitting on the sidelines may want to step in, as there is clearly potential for continued rate increases.
In talking with our local office here at Coldwell Banker, it appears that many buyers have gotten that message, and are accelerating their activity. The challenge is that while inventory is gradually increasing, it continues to lag strong buyer demand. Multiple offers are still the norm. Sellers who are ready to act are able leverage this climate, and in most cases find high demand and aggressive offers for their homes.
The real question is when this trend will move closer to buyer advantage. For sellers who are waiting for prices to peak, any continued uptrend in interest rates will have a drag effect on buyers in terms of how much they can afford to borrow (and therefore spend). Demand is likely to soften as some buyers decide they need to compromise on home size home, location and condition/amenities. The balance of supply and demand doesnâ€™t have to shift all that much to become a tipping point.
So, the short answer is 'Yes', the increasing interest rates will have an effect. There's still pent-up demand and there are many other factors that influence the choices that buyers make, so that effect isn't likely to be instantly dramatic, nor is it likely to send home prices tumbling down, but it will very likely help to put a lid on some of the dramatic increases we've seen.